Delayed Gratification: A Good Lesson for Millennials

Much of our optimism regarding the future is borne out of the fact that we are extremely realistic and pragmatic, having come of age during a rampant technology boom and, subsequently, a major terrorist attack that contributed to a recession.

These two experiences taught us some much needed perspective – what to take seriously, how to process new information and adjust accordingly. Thus, the “Great Recession” should be seen as a challenge to Gen Y to utilize that pragmatism and learn from the mistakes of those older than we are, chiefly the borrowers who got in over their heads purchasing homes they couldn’t afford and the Wall Street titans who made the reckless decision to extend cheap credit to those borrowers.

Packaged Facts, a market research firm, recently issued a new report entitled “Millennials in the U.S.: Trends and Opportunities Surrounding Gen Y Adults”. An abstract of the report on the firm’s website says that while Gen Y has been the hardest hit of any age demographic during the recession, we are also less likely to have cut our spending, and we continue to remain optimistic about the future. The report estimates that by 2015, people ages 18-29 will control $1.5 trillion in aggregate income.

What we do with this income will ultimately have serious implications for our generation and U.S. economic growth. The key to retaining and growing the income that we will earn lies in learning from the financial mistakes made by other generations in recent years and vowing not to repeat them. The financial problems that the Baby Boomers and Gen X’ers had in the aftermath of the credit crisis should serve as a valuable lesson: the importance of delayed gratification.

We face a conundrum in that our own ability to solve problems with technology and to communicate more quickly than other generations has led us to the want of one thing: instant gratification, the human desire to see our needs and wants immediately fulfilled so that we don’t have to wait to be pleased.

From a financial perspective, this type of behavior had wide implications during the financial crisis. After all, how many first-time home buyers borrowed money during the housing boom simply because credit was so cheap, without taking into account whether or not their personal financial situation enabled them to repay the loan? It was instant gratification in action – borrowers wanted to experience the joys of home ownership right away, consequences be damned. Unfortunately, when the chickens came home to roost and the housing bubble burst, borrowers were forced to pay more in mortgage payments than their home was worth.

When it comes to saving and investing, the primary lesson from the credit crisis is that delayed gratification is the only way we can truly ensure a successful, comfortable retirement. Interestingly, one of the principal theories any finance student will learn in an introductory course is that a dollar today is worth more than a dollar in the future. You may have just thought, “See! Instant gratification isn’t all that bad after all.”

But we can’t stop there. After all, how many of us would be content to know that we’re still stuck with the same dollar a year from now? None of us would be. That’s where investment comes in. Provided we understand the risks, we can invest the otherwise static dollar and potentially earn a return on it – and that way, our dollar may actually be worth even more in the future. By foregoing current consumption and instead opting for investment, we may delay gratification, but we’ll experience gratification nonetheless. Just because we delay our consumption doesn’t mean we’ll never get to experience the joys of it.

By saving and investing our money now, we’ll experience even larger benefits down the line because we’ll have much more money to work with. If you invest $10,000 today, without adding anything to it, at an average rate of return of 7% for 30 years, you’ll end up with $76,123, earned without adding any additional money from a career or other outside sources, and it assumes a lower average rate of return than the risk-seeking Millennial will probably be able to earn. After all, our long-term investment horizon will mitigate the downside risk the business cycle and ups and downs of the stock market have on our assets.

Packaged Facts finds that, on the whole, Millennials are optimistic about the future. There’s very good reason to be – we’ve learned from the financial mistakes of other generations, and we won’t repeat them.

Photo by alancleaver_2000

Tim Olsen I'm a 21 year old senior finance major at Louisiana State University in Baton Rouge, Louisiana. My passion is and always will be finance and investing. I bought my first stock at age 8, wrote a book - The Teenage Investor - which was published by McGraw-Hill when I was 13 years old and have interned at a New York City-based hedge fund for 5 years. Now, my goal is to help fellow members of Generation Y learn the importance of saving and investing as early as possible!

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